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TMI Blog2022 (3) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... essment Year 2010-2011 Assessment Year 2011-12 Gross Profit Raito 47.85% 50.89% 59.85% 2.1. From the month-wise purchase, sale and production expenses filed by the assessee, he observed that the assessee company incurred major expenses on production in the month of March. He noted that from the month of April 2010 to December 2010, the assessee made purchases of Rs. 37 crores and in the month of January and February, made purchases of Rs. 40.13 cores. The assessee in its submission justified the increase in production expenses that "because of increase in the price of raw material and accessories and increase in wage rates, production cost was increased." However, the AO while scrutinising the schedule of cost of production, noted that there is sharp decline in production charges. He observed that in Financial Year 2009-10, the assessee made total purchases of Rs. 73.02 crores and incurred production charges Rs. 9.65 Crores. However, in FY 2010-11, the assessee incurred production charges of Rs. 4.82 Crores on a total raw material purchase of Rs. 77.54 Crores and closing stock of raw material and work in progress in both the years are almost same. He also noticed certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rs. 64,49,20,316/-. After deducting the gross profit declared in the books at Rs. 38,98,89,894/-, the AO made addition of Rs. 25,50,30,422/- to the total income of the assessee. He accordingly determined the total income at Rs. 20,01,05,360/-. 3. Before the ld. CIT(A), it was argued that the assessee is engaged in the business of manufacturing and trading of readymade garments and accessories. The sale turnover of the assessee consists of the following three streams:- i. Retail sale of garments manufactured and purchased ('first stream') ii. Trading of fabric ('second stream') iii. Wholesale trading of garments ('third stream') 3.1 It was submitted that in the first stream only, the assessee has to incur production expenses to the extent it relates to the garments manufactured by the assessee. On the rest of the turnover, the assessee is not required to incur any production expenses. Therefore, incurrence of production expenses by the assessee cannot be matched/correlated to the entire purchases/turnover of all the three streams. Thus, the AO has committed an error in taking the gross profit at entity level as the discrepancy alleged to be found by her in the incurrence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the market and also the closure of many retail outlets, the assessee, in order to survive and cut-down the expenses, had shifted its focus on the second stream of the turnover i.e. 'trading of fabric'. It was argued that the turnover of this stream has gone up to 42.20 crores from 14.60 crores. It was argued that there is low profit in the case of trading in the fabrics. 3.2. Relying on various decisions, it was argued that the AO has not appreciated the facts properly and made huge addition on flimsy ground by rejecting the book results which is not correct and not in accordance with law. 4. Based on arguments advanced by the assessee and decisions cited, the Ld. CIT(A) called for a remand report from the AO. After considering the remand report of the AO and the rejoinder filed by the assessee to such remand report, the Ld. CIT(A) deleted the addition by observing as under:- "4.2 I have carefully gone through the submissions made by the appellant, remand reports submitted by the AO and rejoinder submitted by the appellant. As pointed out earlier, the case of the appellant is that under the fact and circumstances of the case, the books of account have been wrongly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2009- 10 to 2010-11 was 13.47% and increase in production expenses from A.Y.2010-11 to 2011-12 is 12.06%. Therefore, it has been explained that increase in production expenses in the year under consideration is also normal increase from year to year. 4.4 In the written submission, it has been explained that the incidence of incurrence of production expenses cannot be seen in the light of incident of making the purchase, which fact has been relied upon by the AO for pointing out the defect in the maintenance of books of account. It has been submitted that the debit of production expenses will depend on issue of raw-material If or manufacturing, issue of bill by the person to whom the job has been handed over and completion of job by him. Thus, there is force in the submission made by the Id. counsel that the production expenses are required to be seen in the light of production and not in the light of purchases made. 4.5 All the data furnished by the assessee was forwarded to the AO and detailed remand report was called for and has been submitted by the AO vide letter dated 06-04-2018, which has also been reproduced above. In para 2.4 the assessing officer has not denied ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence in true spirit in as much as details and data are part of regular books of accounts and no evidence relating to any third party is being filed. 4.8 It has been brought on record that in A.Y. 2012- 13, the assessee had reported loss of Rs. 28,40,34,399. The assessment has been framed by the AO as per assessment order dated 20-03- 2015 which is subsequent to the assessment framed for the year under consideration which is 31-03- 2014. It is seen from the assessment order that the loss of the assessee had been assessed at Rs. 27,61,33,380/- by accepting the books of account and only the two additions have been made which relates to disallowance of donation of Rs. 2,100/- and disallowance u/s 40(a) (ia) Rs. 38,99,000/-. The said assessment order has been annexed as annexure-4 with the written submission filed on 07-12- 2016. 4.9 Assessment for A.Y. 2013-14 has also been framed u/s 143(3) vide order dated 18-03-2016. The assessee had returned a loss of Rs. 24,02,10,005/- which has been assessed at Rs. 23,73,97,410/-. In this assessment order also the AO has accepted the accounts maintained by the assessee and has made some minor disallowances. Thus, the method of accounting mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, I am of the opinion that it is not a fit case for rejection of books of account as no specific defect has been pointed out by the AO in the maintenance of books of account by the assessee except so called discrepancy in the incurrence of production expenses vis-a-vis commensurate incidence of purchase. The increase in the production expenses has been explained by the assessee with reference to earlier year's figures and the increase in the production expenses is normal increase. Incurrence of production expenses also cannot be correlated to the incidence of purchase as incurrence of production expenses would depend on the various factors such as time of issue of raw- material, time of preparation of finished goods and issue of bill by the person performing the job. No other specific defect has been pointed out by the AO either during the course of assessment proceedings or in the remand reports. Therefore, the rejection of books of accounts on account of lower gross profit is not called for particularly in the peculiar facts and circumstances of the case as most of its retail outlets were closed during the year under consideration and rest of the retail outlets were closed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for short payment of TDS was made but books of account were not rejected and the book results were accepted. Referring to the copy of the assessment order for AY 2013-14, copy of which is placed at page 39 to 46 of the paper book, he submitted that here also the AO in the order passed u/s 143(3) on 18.03.2016 has accepted the loss of Rs. 24,02,10,005/-, wherein, he has made addition on account of various other items such as bad debts, traffic fine, deemed income, interest income, disallowance of loss on account of bad debts and disallowance on account of loss of sale of fixed assets but has not rejected the books of account. He submitted that when the assessee has closed down lot of its retail outlets, it is incomprehensible that the gross profit will increase. Relying on various decisions, the ld. Counsel for the assessee submitted that the books of account cannot be rejected merely for the reason that there is decline in gross profit rate. For the above proposition, he relied upon the decisions of the Hon'ble Delhi High Court in the case of CIT vs Winner Construction Pvt. Ltd. reported in (2012) 81 CCH 0091(Del.), CIT vs Paradise Holidays 325 ITR 0013(Del.) and CIT vs Jacksons H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of Ld. CIT(A) on this issue. From the various details furnished by the assessee, we find the case of the assessee was also scrutinized in AY 2012-13 and 2013-14 and in both the assessment years, the AO has passed orders u/s 143(3) and the book results were not rejected and loss declared at Rs.(-) 28,40,34,399/- for AY 2012-13 and loss of Rs.(-) 24,02,10,005/- for AY 2013-14 have been accepted with minor additions on various other issues but not on account of low gross profit. Further, the assessee in the instant case has maintained its books of accounts and such books of accounts were duly audited and the auditors have not pointed out any mistakes in the books of accounts. Such audited books of account along with bills and vouchers were produced before the AO and no specific defects were pointed out by the AO in the books of accounts. The submission of the ld. Counsel for the assessee that out of 199 retail outlets, the company has closed down 84 outlets could not be controverted by the ld. DR. The submission of the ld. Counsel for the assessee that the turnover of the assessee consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case it has been held that section 145(3) can be applied only where the AO is not satisfied about the correctness or completeness of the accounts. The accounts which are regularly maintained in the course of business and are duly audited, free from qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. Reference can be made to the following observations:- In this case it has been held that section 145(3) can be applied only where the AO is not satisfied about the correctness or completeness of the accounts. The accounts which are regularly maintained in the course of business and are duly audited, free from qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn to any provision of the Act or to Rules framed thereunder, requiring the assessee engaged in the business of manufacturing and export of garments or all assessees in general having business income, to maintain stock register, in a particular form. As found by the Tribunal, the income of the assessee was clearly discernible from the accounting method followed by it. Hence, the accounts of the assessee cannot be said to be defective or incomplete, merely because the stock register was not maintained in a particular form. Sec. 145(3) of the IT Act, therefore, could not have been invoked by the AO to the present case". 14. The various other decisions relied upon by the Ld. Counsel for the assessee also supports his case to the proposition that book results cannot be rejected or addition of gross profit cannot be made on the sole or mere fact that the gross profits are very low. In view of the above discussion and in view of the detailed reasoning given by the ld. CIT(A) while deleting the addition, we do not find any infirmity in the order of the Ld. CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. 15. In the result, the appeal filed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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